Archive | February 2018

If interest rates rise………….

For almost ten years, interest rates have been remarkably low and even on occasion negative (in Japan). Central banks have deliberately kept them low, while expanding the supply of money (quantitative easing), as a means of allowing the global economy to recover from the 2008 financial shock.

But the era of “cheap money” (remember to consider interest rates as being both the cost of borrowing and the price of money) will probably end this year. The US economy, in particular, seems to be in an inflationary gap with an unemployment rate of only 4.1%, which could be below its natural rate of unemployment.  And, in countries such as Britain, inflation is already above the Bank of England’s target of 2%.

Consequently, the Federal Reserve (the US central bank) and some other central banks (but not the European Central Bank nor the Bank of Japan),  will want to raise interest rates soon and significantly in order to deter borrowing for investment and consumer expenditure for large-ticket items (such as cars) which are bought on credit. This would shift aggregate demand to the left.

Without low interest rates, speculators and dealers in shares and property cannot borrow cheaply to continue purchasing these assets whose prices have risen faster than wages in recent years.  More seriously, for the real economy, some firms which have relied on low borrowing costs to keep going may go bust should their bank raise loan rates.

These forebodings are the main reason for the volatility of share prices in the last week. The large drops are also partly due to the inevitable and necessary correction to a speculative bubble,  which has also been observed in bitcoin dealings. It is however unfortunate that the side-effects of such gambling in assets impact the real economy, in terms of investment in capital and employment rates.

JM Keynes observed that stock markets are just casinos but “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”.

 

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Will China continue to recycle our waste?

I had not realized that China has been willing to pay for and to recycle a lot of  European, Japanese, Australian and American garbage into, for example, carpets and pipes.  It  recycled 56% of the world’s plastics and also bought millions of tons of scrap metal and waste paper every year from overseas.

But now China does not want so much waste shipped to it, partly because it is richer and can afford to buy new materials, such as plastics, for manufacturing. It also complains that a lot of the garbage had been insufficiently sorted and thus often contained filthy and hazardous materials. Therefore, it is restricting the categories of garbage that it will buy.

This has many implications for garbage collection in the countries that could previously rely on selling large amounts of their waste to China. The external costs of packaging, consuming, and manufacturing have increased significantly.  Recycling and sorting machines will need to be improved. Households and firms will need to be told to lower the amount of garbage they chuck out and to improve and/or refine their sorting into different categories. Maybe, in the long run, this is good for us all and for the globe, if we are made more aware of the true costs of rubbish.

 

Collusion and Confession among Japanese firms

The Fair Trades Commission (FTC) is investigating several construction firms on suspicion that they have been colluding (by sharing information and dividing up projects) in tendering for construction work on the Tokyo-Osaka maglev train line project.

If the firms have formed a cartel (even a tacit or informal one) to engage in bid-rigging (price-fixing), they are violating anti-monopoly laws and could face very large fines. But following the initial raids, one of the companies, Obayashi, reported to the FTC that it had conspired with three companies for maglev construction tenders.

Under the FTC’s leniency rules, companies voluntarily reporting antitrust violations escape a fine. The company that does so first will also avoid criminal charges.

Possibly, therefore, game theory analysis could be used to analyze what is likely to happen. Is there a dominant strategy to confess?

And a few days later, another company, Shimizu, after initially denying wrongdoing, confessed to fixing bids for construction projects. But two other firms are still maintaining their innocence. They apparently admit that officials met and exchanged information about the projects, but deny that they actually fixed bids or split the projects among them.

Nonetheless, you could still try setting up a pay-off matrix for Obayashi and Shimizu to show why they both confessed, hoping for lighter fines.

https://www.japantimes.co.jp/news/2017/12/19/national/crime-legal/major-contractor-obayashi-admits-antitrust-violation-maglev-bid/#.WnZe71SWaM8

https://asia.nikkei.com/Business/Companies/Japan-s-Shimizu-admits-to-rigging-maglev-bids